Shrinking credibility leaves sterling resembling an emerging-market currency

Andrew Bailey and Rishi Sunak — Bank of England chief Andrew Bailey and chancellor Rishi Sunak

(Image credit: © STEFAN ROUSSEAU/POOL/AFP via Getty Images)

“Investors are increasingly discussing GBP as taking on emerging-market characteristics… parallels to the 1970s resonate as being one of the worst post-war decades for the UK,” says Kamal Sharma of Bank of America. The pound has been the third worst-performing currency in the G10 club of developed countries this year, behind the Japanese yen and the Swedish krona.

Blame the “increasing politicisation” of UK monetary policy, which is undermining confidence in sterling in a way reminiscent of an emerging economy, while foreign investors are less willing to fund the UK’s trade deficit as UK assets now appear less undervalued than they were in 2021.

Comparison of the pound with an emerging-market currency is “hyperbolic”, but “it is true that sterling no longer behaves like the hard currency it once was”, says Jim Armitage in The Sunday Times. “Since December, the Bank of England (BoE) has hiked rates four times – but the pound has barely reacted.” A “currency’s strength is, in large part, a reflection of the market’s view on the productivity and strength of the economy behind it”.

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Since Brexit sterling has been valued at a discount to account for the diminished prospects for British exporters and rising UK labour costs.

There are valid questions about the BoE’s performance, says Jeremy Warner in The Daily Telegraph. “Too often it seems a creature of the government’s need for deficit financing”, rather than an independent institution. “The government’s refusal... to acknowledge that Brexit has played any part in deteriorating trade only further inflames the situation.”

That doesn’t mean sterling’s days are numbered. A strong dollar explains as much as any domestic UK problems. “Against the euro, the pound’s lost only a couple of cents.”

The pound is falling hard – is a UK recession on the cards?

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.